Key Takeaways
- • KPMG identifies six top risk management issues facing private equity firms: technology, third-party, fraud and misconduct, cyber, compliance, and crisis management risk.
- • KPMG Principal Shruti Shah argues that PE firms face threats that can rapidly erode firm and portfolio company value, with news traveling faster than firms can respond.
- • Risk at a portfolio company is treated as risk to the PE firm itself, requiring risk management that extends across the portfolio.
- • Regulators are clear that outsourcing work to third parties does not transfer responsibility away from the PE firm.
- • Many PE firms have budgets and focus not aligned to escalating risks, according to the KPMG article.
Summary
A KPMG advisory piece by Shruti Shah, Principal in Advisory Services at KPMG LLP, published via the American Investment Council, sets out six risk categories that private equity firms should manage. Shah writes that the value of a PE firm and its portfolio companies can fall sharply before management has a chance to react, and that the challenges now extend well beyond business cycles and volatile markets to strategic, operational, and external risks.
On technology, the article argues that technology risk management is more than information security and must measure both the firm's own exposure and that of its portfolio companies. On third-party risk, it notes that PE firms routinely engage outside contractors, which can damage reputation and investments, and that financial services regulators hold that outsourcing does not shift responsibility away from the firm. Fraud and misconduct risk is highlighted as elevated for firms with holdings in markets where fraud, bribery, and corruption are part of the culture, and the article stresses that transparency with limited partners and regulators is key when issues arise.
Cyber risk is described as coming from employees, third parties, and outsiders. KPMG contends that spending alone will not deter attacks and that a narrow response leaves firms more vulnerable to breaches and regulatory penalties. On compliance, the article states that laws and regulations affecting the sector have grown exponentially over recent years, so the business model must now balance costs against the need for a robust compliance infrastructure. Crisis management risk is framed around speed: social media and the news cycle may leave firms only a few hours to respond to allegations of fraud, misconduct, or bribery, and KPMG recommends a crisis team ready to act at any time.
The article concludes that while risk management can be costly and time consuming, it saves firms more in the long run. The full KPMG report, which the article references, contains practical mitigation actions.
On technology, the article argues that technology risk management is more than information security and must measure both the firm's own exposure and that of its portfolio companies. On third-party risk, it notes that PE firms routinely engage outside contractors, which can damage reputation and investments, and that financial services regulators hold that outsourcing does not shift responsibility away from the firm. Fraud and misconduct risk is highlighted as elevated for firms with holdings in markets where fraud, bribery, and corruption are part of the culture, and the article stresses that transparency with limited partners and regulators is key when issues arise.
Cyber risk is described as coming from employees, third parties, and outsiders. KPMG contends that spending alone will not deter attacks and that a narrow response leaves firms more vulnerable to breaches and regulatory penalties. On compliance, the article states that laws and regulations affecting the sector have grown exponentially over recent years, so the business model must now balance costs against the need for a robust compliance infrastructure. Crisis management risk is framed around speed: social media and the news cycle may leave firms only a few hours to respond to allegations of fraud, misconduct, or bribery, and KPMG recommends a crisis team ready to act at any time.
The article concludes that while risk management can be costly and time consuming, it saves firms more in the long run. The full KPMG report, which the article references, contains practical mitigation actions.
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